A guide to HMRC’s new VAT penalty system

Feb 7, 2023 | Tax Tuesday

You’re probably already aware that from the 1st of January 2023, HMRC introduced a new VAT penalty system for the late filing of VAT returns, as well as for the late payment of VAT bills. The new VAT returns system is points-based, and the penalties for late bill payment is two-tiered.

Introducing two systems at once understandably has the potential to create confusion for taxpayers, so in this week’s Tax Tuesday we thought we’d break it down for you.

So, what is the new system?

Under the new points-based system, each time you submit a VAT return late, you will receive one point. When you reach the threshold for points, you will then receive a £200 fine. Following this, you will be subject to a period of compliance – this is a set period of time during which your returns must be filed on time, and all outstanding VAT returns from the previous 24 months must be submitted. Once both of these conditions are met, your points will return to zero.

It’s important to note that the points thresholds correlate with individuals’ accounting period lengths. It wouldn’t exactly be fair if someone who files their VAT returns monthly was held to the same points threshold as someone who uses an annual accounting period! Therefore, HMRC have set out the following thresholds:

Accounting period Points threshold
Monthly 5
Quarterly 4
Annually 2

Not only this, but HMRC have also outlined the thresholds that shall be applied to those who use non-standing accounting periods:

Accounting period Points threshold
Over 20 weeks Annual rules apply
Over 8 weeks but no more than 20 Quarterly rules apply
8 weeks or less Monthly rules apply

Under the new system, HMRC has explained that there is no connection between the penalty applied, and the amount of VAT due on the return. As a result of this, those filing nil returns will be subject to late filing penalties.

Late payment of a VAT bill

VAT bill late payment penalties are a completely different system to VAT returns. Under this, there are two penalties which will be implemented, depending on how late the payment is…

The first penalty is set out in two parts. Firstly, 2% of the unpaid VAT is applied as a penalty on the 15th day of the payment being late, and then a further 2% penalty will be received at 30 days of late payment. If the bill is paid later than this, the second penalty will be received on the 31st day of late payment. This penalty involves the taxpayer being charged daily at an annual rate of 4% of the outstanding amount.

It is worth noting that HMRC have introduced a Time to Pay (TTP) agreement, which will act as a temporary payment.  On the day that the taxpayer applies for a TTP agreement, the penalty will be paused by HMRC. If the terms of the agreement are broken, the taxpayer will be treated as if the TTP never existed and the full penalties will be applied. It’s hoped that the TTP agreement will encourage taxpayers to communicate with HMRC if they are struggling with their finances, instead of becoming overwhelmed by late payments.

Until the 31st of December 2023, HMRC will be operating under a period of familiarisation during which only the second stage penalties will be applied to late payments. This will mean that taxpayers can pay their VAT bills late for up to 30 days without receiving any penalties.

How can we help?

Questions relating to VAT? Contact our team for advice at tax@haroldsharp.co.uk or call 0161 905 1616.